Bullish or Bearish, You Need a Plan

Janet Brown, editor of NoLoad Fund*X, says investors learned some hard lessons from the bear market, but staying out of the market should not be one of them.

Some of the best opportunities occur immediately following a bear market. Last November, we cautioned investors against bailing out near market bottoms. Market recoveries typically occur in bursts, particularly during the months following a trough—the average gain for the six months following market troughs since 1930 was 31%. Since the recent low in March, the Standard & Poor’s 500 index is now up over 50%.

But while most funds are starting to recover from last year’s losses, many investors are still in cash and have yet to participate in this year’s rally. Regardless of recent gains, the steep losses nearly all investors faced last year caused most to look at managing risk. It’s critical to focus on the future and plan from today forward. You cannot change the past, but you can learn from your experiences—and from ours.

Over the past 40 years of Upgrading, we’ve learned:

Without appropriate asset allocation, “would-be” long-term investors often become their own worst enemy—selling after declines, and buying back after major advances.

It generally pays to be optimistic. Markets go up and down. Stock rallies stall before continuing. Over the long term, however, the stock market has averaged about 10% per year, about twice the return of bonds.

Businesses have intrinsic value and some stocks will gain, even if the broad market falls.

It’s never too late to adjust your asset allocation to meet your current and future needs. The key is to act rationally, not emotionally. Make changes incrementally and recognize that consistent action over long periods is rewarded.

Despite the market’s seven-month rally, many investors who bailed out at some point are still on the sidelines. It’s understandable, after the shock of last year, to be anxious about jumping back in, so consider moving in gradually. We suggest setting a plan to get invested and putting that plan into action.

The first step is to determine what mix of equities and fixed income is right for your long-term goals and your own tolerance for risk. Then, move toward that target mix gradually by dollar-cost averaging.

By investing little by little, you’ll avoid trying to guess the “right” time to invest, and you’ll be prompted to take action regardless of near-term market action. There’s the comfort of knowing that if the market continues to rally, at least part of your portfolio is participating, and if the market goes down after you started moving in, at least it will only affect only part of your portfolio.

By devising a schedule and sticking to it, you can overcome the paralysis many investors are experiencing right now. That’s a plan for reaching your investment goals.